Non-Profit and Tax-exempt: What’s In a Name?

What is the difference between a “non-profit” organization and a “tax-exempt” organization? I hear these terms used interchangeably – do they mean the same thing?

Great question! These terms do not mean the same thing. All tax-exempt organizations are non-profits; however, not all non-profits are tax exempt.

When an organization wishes to be classified as “non-profit”, it must register with a state – usually the state in which it operates. Every state has different classifications for non-profit organizations. For instance, New York and some other states have a type of business classified as a “Not-For-Profit Corporation.” Other states have corporations that are classified as “Non Stock Corporations.” What all of these corporations have in common is that they do not have any owner, and the business of the organization is run by a board of directors.

Once an organization formally registers as a non-profit company with the state, the organization can request federal tax-exempt status with the Internal Revenue Service. If granted tax-exempt status by the IRS, an organization will not have to pay federal taxes on its income (provided that income is related to the organization’s “charitable mission”), and donations made to the organization generally will be tax deductible for the donor.

States often have additional requirements for organizations to qualify for tax-exempt status. Some states will grant tax-exempt status automatically to organizations that have been granted federal tax-exempt status, while others require the organization to complete a separate request.

Some businesses elect to become non-profits without also being tax exempt. They do so for many strategic, marketing, and organizational reasons. However, the important take-away here is that not all non-profits are tax exempt. A tax exempt non-profit is subject to far greater government oversight and operational restrictions than a regular non-profit. Unless a non-profit organization is granted tax exempt status by the IRS, that organization is subject to the same tax and filing obligations as any other business!

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THIS IS NOT LEGAL ADVICE!

The purpose of this blog is to provide general advice and guidance, not legal advice. Please consult with an attorney familiar with your specific circumstances, facts, challenges, medications, psychiatric disorders, past-lives, karmic debt, and anything else that may impact your situation before drawing any conclusions, deciding upon a course of action, sending a nasty email, filing a lawsuit, or doing anything rash!